The warning that Spain received from the IMF yesterday over the need for structural reforms highlights once again the rigidity of labor markets and their effects on productivity.

According to the IMF, Spain needs to make structural reforms in order to avoid an “L-shaped” profile following the GDP contraction in 2009 that the IMF forecast at 1%. The rise in public debt needed to combat the crisis could only be easily overcome if markets were more flexible, said the IMF, mentioning in particular labor markets.

The labor-market reforms it called for were: lower dismissal costs, to boost hiring of younger and better educated workers; more flexible collective bargaining agreements to prevent bankruptcies and preserve jobs; and an end to wage indexation with inflation, which has sapped Spanish competitiveness.

In the absence of these reforms, the IMF said, Spain could get stuck in a “low-competitiveness, slow-growth, extended-deleveraging, and high-unemployment equilibrium, from which returning to lower public debt would be difficult”.

Spanish labor markets are among the most rigid in the OECD despite a series of small reforms since the 1980s. High dismissal costs for workers on indefinite contract have made firms reluctant to make new permanent hires, which has left the country with a temporary employment rate of more than 30%. In the current crisis, temporary jobs are the first to be eliminated, leaving in particular young workers, women and immigrants with much higher unemployment rates.